How Supap Kirtsaeng’s Textbooks Idea Led to Supreme Court

A customer looks through stacks of books while shopping at a Costco Wholesale Corp. store in Arlington, Virginia. Photographer: Brendan Smialowski/Bloomberg

Oct. 26 (Bloomberg) -- A graduate student’s money-making
idea has led to a commercial showdown at the U.S. Supreme Court,
with ramifications for publishers, retailers, entertainment
companies, manufacturers and consumers.

The court will hear arguments on Oct. 29 in the case of
Supap Kirtsaeng, who was ordered to pay John Wiley & Sons Inc.
$600,000 for importing the publisher’s copyrighted textbooks
from his native Thailand and selling them in the U.S. for a
profit. At stake is the future of the so-called gray market, the
annual trade in tens of billions of dollars in goods outside
their official distribution channels.

The case pits business against business. Retailers that
offer gray-market products, led by EBay Inc. and Costco
Wholesale Corp., are joining libraries and second-hand stores in
backing Kirtsaeng. The motion picture, music, software and
publishing industries are supporting Wiley, arguing that the
practice illegally undercuts their U.S. sales.

“This is fundamental to the creative industries,” said
Charles Sims, a Washington lawyer who filed a brief on behalf of
the Association of American Publishers.

Gray market products are genuine goods that retailers
acquire through unauthorized channels to exploit the lower
prices manufacturers sometimes charge overseas. Imports of those
products to the U.S. cost makers as much as $63 billion in sales
a year, according to a 2009 Deloitte LLP analysis conducted for
Bloomberg News.

First Sale

The case poses a copyright question that deadlocked the
Supreme Court 4-4 in a 2010 clash between Costco and Swatch
Group AG’s Omega unit over discounted watches.

Justice Elena Kagan didn’t take part in that case and now
stands to cast the deciding vote. That’s potentially bad news
for the gray market because Kagan, a former top Supreme Court
lawyer in the Obama administration, had filed a brief supporting
Omega in the Costco case.

The dispute turns on a legal doctrine that says a copyright
holder can profit only from the original sale of a product. In
1998, the Supreme Court unanimously said that so-called first-sale doctrine applies to U.S.-made products that are sold
overseas. The ruling meant that purchasers could bring those
goods back into the U.S. to sell or distribute even if the
copyright holder objected.

The question now is whether that same reasoning applies
when companies manufacture goods abroad. The New York-based 2nd
U.S. Circuit Court of Appeals ruled that it doesn’t, siding with
Wiley and upholding the jury award.

Math Student

The appeals court pointed to a provision in federal
copyright law that limits the first-sale doctrine to goods
“lawfully made under this title.” The panel said foreign-made
goods don’t fit that description.

Kirtsaeng, who studied mathematics at the University of
Southern California, generated about $900,000 in revenue by
selling textbooks published by Wiley and other companies. His
family members bought the books from stores in Thailand and
shipped them to the U.S., where Kirtsaeng sold them on EBay.

The Wiley books were virtually identical to the U.S.
editions, though each was marked to say it was not to be
exported to another part of the world.

A Manhattan federal jury found Kirtsaeng liable for
copyright infringement and awarded the company $600,000. A judge
later ordered Kirtsaeng to turn over personal property,
including his computer and golf clubs -- something Wiley says
occurred only because he had transferred at least $170,000 out
of the country.

Owning It

Kirtsaeng’s supporters in the Supreme Court case say the
jury award and the 2nd Circuit’s reasoning would undermine one
of the basic underpinnings of U.S. property law.

“If you buy a legitimate, authentic good, then you own it,
plain and simple,” said Hillary Brill, EBay’s global policy
counsel. “You have a right to resell it, lend it, give it away
or donate it.”

Taken to its logical extreme, elimination of the first-sale
doctrine for foreign-made goods would prevent libraries from
lending books, bar consumers from re-selling items and even stop
museums from displaying artwork in violation of the copyright
owner’s rights, those critics say.

Such a ruling would have “absurd ramifications for our
commerce and culture,” said Marvin Ammori, a legal fellow with
the New America Foundation, a nonprofit policy group in
Washington.

Kirtsaeng also contends that a ruling favoring Wiley would
give manufacturers an incentive to move production facilities
overseas.

Chicken Little

Wiley and its allies say lower courts have uniformly ruled
in favor of copyright owners on the issue, without any of the
repercussions forecast by Kirtsaeng and his supporters.

“All of that is Chicken Little,” said Sims, the lawyer
representing the publishing industry. “It’s made up. It’s not
real. There is no threat to the museums of the United States or
to the libraries of the United States.”

When Congress enacted the Copyright Act in 1976, lawmakers
intended that publishers, moviemakers and other copyright owners
would be able to control where their products would be sold and
at what price, Sims said.

“You can distribute in the United States at the price
appropriate for the U.S. market, and you can distribute less-expensive copies in India that may not have all the bells and
whistles,” he said. “If they can’t protect those markets that
way, what will happen is either they won’t sell abroad or they
won’t be able to sell in the United States.”

Costco’s Watches

As in the Costco case, the Obama administration is backing
the copyright owners, contending that other provisions in the
law provide protection against abuses. The government points to
a provision it says guarantees that libraries could lend books
they import legally.

In its clash with Omega, Costco may have forged a separate
path for retailers to avoid copyright liability. That fight
centers on Seamaster watches that bore a copyrighted logo on the
back and were originally sold abroad. Costco acquired the
watches from a distributor and sold them for $1,200, almost $700
below Omega’s suggested retail price.

The Supreme Court’s split in the case meant that Costco
couldn’t invoke the first-sale doctrine. Costco later won
dismissal of the suit anyway when a federal trial judge ruled
that Omega had misused its copyright. Omega is appealing.

Costco sells gray-market handbags as well as luxury
watches, says John Sullivan, the company’s associate general
counsel. He says Costco acquires the vast majority of its
products through authorized channels, tapping the gray market
only when product-makers won’t deal directly with the retailer.

“Manufacturers are actually getting the benefit of the
sales,” Sullivan said. “A company like ours exposing these
goods to a broad group of highly desirable customers is a good
thing for them.”